Cash in, and then what?

Feds find problems with how state Education Department is set to track stimulus funds

By RICK KARLIN Capitol bureau

Published 1:00 am, Tuesday, January 5, 2010

ALBANY -- How well can New York account for the billions of dollars in education stimulus funding coming to the state from Washington, D.C.?

Not very, according to a recent audit by the federal Department of Education's Inspector General, which turned up holes and shortfalls in the way the state Education Department had been set up to police the influx of money.

Unless they're corrected, the gaps in New York's oversight system could open the door to "unallowed, unsupported, or fraudulent expenditures" of stimulus dollars, according to federal inspectors.

State officials, however, say the Inspector General's audit of "internal control" systems was completed before stimulus dollars were handed out, and that they've already moved to beef up their oversight.

Either way, the audit -- which was quietly released late last year -- highlights the difficulty that New York and other states face in making sure that stimulus money from the American Recovery and Reinvestment Act of 2009 isn't wasted.

The state Education Department "had made insufficient progress in establishing controls to ensure compliance with ARRA reporting requirements," concluded part of the audit, which was conducted during the summer by Regional Inspector General for Audit Daniel Schultz.

In addition to paying for brick-and-mortar projects such as road repaving, the stimulus plan is dispensing billions for education nationwide.

In New York, more than $4.7 billion has been allocated for education, including almost $1.7 billion to be handed out by the state Education Department, according to the audit.

Much of the money is being used to prevent cuts such as teacher layoffs. Gov. David Paterson and lawmakers late last year decided to "spin up" $391 million of next year's allotment to close the gap during the current fiscal year -- a move that Comptroller Tom DiNapoli has said will create a $2 billion education funding gap starting in 2011.

Against this backdrop, the stimulus plan has drawn its share of critics -- especially many Republicans, who have characterized it as a giveaway. Because of that, the Obama Administration is pushing to guard against waste, fraud and abuse, leading to the Inspector General's audits of selected states and programs.

Both state and federal officials stressed that the audit was completed before any money was dispersed, although the Inspector General may come back and look at actual spending as time goes by, said IG spokeswoman Catherine Grant.

Still, the 17-page audit found potential problems with how the state had been set up to oversee funding.

The Education Department, according to the IG, didn't require local school districts to adequately verify how the funding was going to be spent.

Additionally, the IG noted that state Education Department officials told them they relied in part on their own Office of Audit Services to help ferret out improper spending. Yet when the federal IG looked at the OAS's Web site, they found no "internal or school district audit reports issued during the calendar year." (The site currently shows the most recent district audit was issued in October 2009 of the Niagara Falls school district -- but that was after the federal review. Prior to that, there had been none since 2007. There were no "internal" audits of Education Department offices since 2007.)

In its response, the state Education Department suggested that the level of oversight demanded by the federal government was unrealistic.

"There are nearly 700 school districts in New York that will be recipients of ARRA funds. This sheer volume of districts precludes on-site verification,'' noted part of the state's response, written by Deputy Commissioner Theresa Savo.

"We are concerned that moving to a more restrictive cash management policy would be contrary to the intent of ARRA," says another part of the response.

Critics were quick to point to the study as a sign of the state's failure to keep an eye on its wallet.

The audit's fallout may provide an early test to see if New York's new Education Commissioner, David Steiner, will be able turn around his agency's vast and, according to critics like Brooks, lumbering bureaucracy.

The extent to which Steiner can make changes could translate into future federal dollars gained or lost.

Like other states, New York is competing for a piece of $4.35 billion in federal Race to the Top education grants, which will be awarded to states that are exhibiting a spirit of innovation.

Dunn said his agency has taken the audit's suggestions to heart, and has already made improvements.

Among the changes: a "risk assessment" using 37 financial factors to identify districts that will require additional oversight. And during the next two years, the state plans to monitor a dozen representative school districts, a process that will include on-site audits.

Also, Dunn said, they've since developed a Web-based system for tracking and verifying data required by the federal government.

"We put a lot of what they suggested into place, and the money has begun to flow," he said.